OVDP and Expanded Streamlined Filing Procedures
First in 2009, and again in 2011 and 2012, the IRS initiated the Offshore Voluntary Disclosure Program (OVDP), which is designed to encourage taxpayers with undisclosed foreign accounts to disclose all offshore accounts, bring themselves into full compliance with federal tax law, and reduce their exposure to criminal penalties that could flow from willful violation of the law. The most recent version of this program is an extension of the 2012 initiative. Referred to by the shorthand “2014 OVDP,” it makes significant alterations to the 2012 program, including increasing the miscellaneous civil penalty from 27.5% to 50% for taxpayers without accounts at certain foreign banks. Simultaneously with the 2014 OVDP, the IRS announced an expansion of its Streamlined Filing Compliance Procedures, another program designed to bring taxpayers that have failed to disclosure foreign financial assets into compliance. The interaction between these two programs is discussed below.
Who is eligible for 2014 OVDP? Any taxpayer (individual, corporation, or partnership) that has undisclosed offshore assets or accounts and meets the criteria set out in IRM 126.96.36.199 may participate. The taxpayer must also not be under civil examination by the IRS for any reason, whether or not it is related to undisclosed foreign accounts or assets. Furthermore, a taxpayer may participate even if he or she previously made inadequate, so-called quiet disclosures or is unable to make immediate, full payment taxes and penalties. Note that applicants who submitted under previous versions of OVDP whose cases have not yet been resolved by a closing agreement may request that the case be considered under the 2014 OVDP.
Why participate? The primary reason to disclose previously undisclosed foreign assets and bank accounts to the IRS is to reduce exposure to criminal liability due to willful violations and reduce civil penalties. Merely filing amended returns is insufficient, because taxpayers who do say may still be criminally prosecuted. Possible criminal penalties that can be avoided through participation in OVDP include tax evasion, filing a false return, and failing to file an income tax return, each of which carries substantial prison terms and fines.
Streamlined Filing Procedures and Treatment Under OVDP. In contrast to OVDP, the streamlined filing procedures allow taxpayers who have failed to disclose a foreign financial asset to become compliant by certifying that they did not willfully fail to report — and pay tax on — foreign financial assets. Significantly, the 2012 streamlined procedures have been expanded to include U.S. taxpayers residing both outside and inside the U.S:
- U.S. taxpayers residing outside the U.S.: pay no penalty as long as the failure to disclose assets and pay taxes was the result of non-willful conduct.
- U.S. taxpayers residing inside the U.S.: pay a 5% penalty (the Title 26 miscellaneous offshore penalty) as long as as the failure to disclose assets and pay taxes was the result of non-willful conduct.
Note that once a taxpayer submits returns under the streamlined filing procedures, he or she is ineligible to participate in OVDP, and vice-versa: once an OVDP application is submitted, the streamlined filing procedures become unavailable. Deciding whether to participate in either program is a critical matter that you should discuss with an experienced tax attorney. If the facts of your case make it clear that your failure to disclose foreign financial assets occurred through no fault of your own, then OVDP — and its higher penalty structure — might not be appropriate for you; instead, the streamlined filing procedures and its associated lower (or zero) penalties may be available. On the other hand, if it is clear that you willfully decided not to report a foreign financial asset, then OVDP may be a more appropriate course of action.
These decisions are highly fact-specific and should be undertaken in consultation a Certified Tax Law Specialist, who can help you navigate the process smoothly and reduce your exposure to civil and criminal liability. Contact William D. Hartsock, Esq. today at (858) 481-4844 to discuss your case.